Authentication and authorization help ensure that online transactions are legitimate, safe, and secure. For merchants, understanding these two steps is essential for safeguarding customer trust, efficient processing, and complying with industry standards.

Authentication and authorization in online payments

What is payment authentication?

Authentication is the process of verifying the identity of the person attempting to make a transaction. Authentication focuses on preventing unauthorized users from initiating payments by confirming the identity of the cardholder or account owner.

Common methods include passwords, OTPs, biometrics, and security questions. With the rise of more advanced technologies, multi-factor authentication has become more standard.

What is payment authorization?

Authorization follows authentication. It involves approving the transaction amount and verifying that the account or card being used has the necessary funds available. This step is crucial for validating that the payment can actually be processed.

Steps involved in authentication and authorization for online transactions

1. Payment initiation: The customer enters relevant information, such as card details, and proceeds to make the payment.

2. App authentication: The customer must verify their identity on the merchant's app or website through biometric verification, passwords, or OTPs.

3. Transaction request: After authentication, the payment request is sent to the acquiring bank.

4. Authentication request: The customer must verify their identity through passwords, OTPs, or a security question or 3DS check through the card network.

5. Card network verification: Once the card network authenticates the customer's identity, the request is routed to the issuing bank.

6. Issuing bank approval: The issuing bank checks the account balance, fraud history, and other factors to approve or decline the request.

7. Response to merchant: If approved, the transaction is authorized, and the funds are held until settlement.

Key difference between payment authentication and authorization

While closely related, authentication and authorization serve distinct purposes:

• Authentication confirms the identity of the user initiating the transaction, ensuring they are the rightful cardholder.

• Authorization approves the payment amount, ensuring sufficient funds and marking them for future transfer to the merchant.

Importance of authentication and authorization

Authentication and authorization together create a layered defense against fraud. Adopting advanced methods like biometric verification or multi-factor authentication can significantly decrease fraudulent activity. Using a secure payment gateway like Zoho Payments for authorization can further bolster transaction safety and decrease fraud risks.

Merchants should be aware of regulations like PSD2 and PCI-DSS that mandate certain authentication and authorization protocols. Adhering to these not only minimizes fraud but also helps avoid fines.

While security is essential, lengthy or overly complicated authentication steps can lead to cart abandonment. Choosing streamlined, compliant solutions that balance security with convenience can enhance the customer experience without compromising safety. For example, Zoho Payments offers a smooth, and hassle-free checkout with our efficient checkout widget.

Conclusion

In summary, authentication validates identity, and authorization validates funds. Both are necessary for processing a secure, fraud-free transaction. In an age where digital payment fraud is a rising concern, authentication and authorization serve as cornerstones of trust, security, and regulatory compliance in the payments ecosystem. They prevent unauthorized access, confirm transaction legitimacy, and protect against losses. With continued advances in technology and rising regulatory standards, staying informed on best practices in these areas helps merchants provide a safe, smooth, and compliant payment experience.